Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
FORM 10-Q
____________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
OR
¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934
For the transition period from_______to_______    
Commission file number 0-23939
 _____________________________
COLUMBIA SPORTSWEAR COMPANY
(Exact name of registrant as specified in its charter) 
Oregon
 
93-0498284
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification Number)
14375 Northwest Science Park Drive
Portland, Oregon
 
97229
(Address of principal executive offices)
 
(Zip Code)
(503) 985-4000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol
 
Name of each
exchange on which registered
Common stock
 
COLM
 
The NASDAQ Stock Market LLC
_____________________________________
Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
¨
Non-accelerated filer
¨  
Smaller reporting company
¨
Emerging growth company
¨
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨    No  x
The number of shares of Common Stock outstanding on April 19, 2019 was 68,301,238.

Table of Contents

COLUMBIA SPORTSWEAR COMPANY
MARCH 31, 2019

TABLE OF CONTENTS
Item
 
Page
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 6.
 


1
Table of Contents

PART I—FINANCIAL INFORMATION
Item 1.    FINANCIAL STATEMENTS
COLUMBIA SPORTSWEAR COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
 
 
March 31,
2019
 
December 31,
2018
 
March 31,
2018
ASSETS
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
Cash and cash equivalents (Note 16)
 
$
430,447

 
$
437,825

 
$
717,216

Restricted cash (Note 17)
 
—

 
13,970

 
—

Short-term investments (Note 16)
 
272,603

 
262,802

 
90,978

Accounts receivable, net of allowance of $8,388, $11,051, and $7,696, respectively
 
341,136

 
449,382

 
316,415

Inventories
 
520,614

 
521,827

 
405,971

Prepaid expenses and other current assets
 
73,850

 
79,500

 
72,788

Total current assets
 
1,638,650

 
1,765,306

 
1,603,368

Property, plant and equipment, at cost, net of accumulated depreciation of $500,018, $489,354, and $467,047, respectively
 
298,379

 
291,596

 
281,213

Operating lease right-of-use assets (Note 8)
 
362,568

 
—

 
—

Intangible assets, net (Note 5)
 
125,830

 
126,575

 
128,810

Goodwill
 
68,594

 
68,594

 
68,594

Deferred income taxes
 
77,760

 
78,155

 
77,043

Other non-current assets
 
41,928

 
38,495

 
29,656

Total assets
 
$
2,613,709

 
$
2,368,721

 
$
2,188,684

LIABILITIES AND EQUITY
 
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
 
Accounts payable
 
$
186,943

 
$
274,435

 
$
167,328

Accrued liabilities (Note 7)
 
224,385

 
275,684

 
206,145

Operating lease liabilities (Note 8)
 
59,214

 
—

 
—

Income taxes payable
 
9,302

 
22,763

 
10,261

Total current liabilities
 
479,844

 
572,882

 
383,734

Non-current operating lease liabilities (Note 8)
 
337,832

 
—

 
—

Income taxes payable
 
50,610

 
50,791

 
61,538

Deferred income taxes
 
9,112

 
9,521

 
171

Other long-term liabilities
 
15,662

 
45,214

 
51,888

Total liabilities
 
893,060

 
678,408

 
497,331

Commitments and contingencies (Note 9)
 

 

 

Columbia Sportswear Company Shareholders' Equity:
 
 
 
 
 

Preferred stock; 10,000 shares authorized; none issued and outstanding
 
—

 
—

 
—

Common stock (no par value); 250,000 shares authorized; 68,346, 68,246, and 70,113, issued and outstanding, respectively (Note 10)
 
94

 
—

 
36,190

Retained earnings
 
1,723,873

 
1,677,920

 
1,629,279

Accumulated other comprehensive loss (Note 13)
 
(3,318
)
 
(4,063
)
 
(8,949
)
Total Columbia Sportswear Company shareholders' equity
 
1,720,649

 
1,673,857

 
1,656,520

Non-controlling interest (Note 4)
 
—

 
16,456

 
34,833

Total equity
 
1,720,649

 
1,690,313

 
1,691,353

Total liabilities and equity
 
$
2,613,709

 
$
2,368,721

 
$
2,188,684

See accompanying notes to condensed consolidated financial statements.

2
Table of Contents

COLUMBIA SPORTSWEAR COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
 
 
Three Months Ended March 31,
 
2019
 
2018
Net sales
$
654,608

 
$
607,308

Cost of sales
317,879

 
307,870

Gross profit
336,729

 
299,438

Selling, general and administrative expenses
251,755

 
243,368

Net licensing income
2,984

 
3,251

Income from operations
87,958

 
59,321

Interest income, net
3,400

 
2,296

Other non-operating income (expense), net
446

 
(268
)
Income before income tax
91,804

 
61,349

Income tax expense
(17,627
)
 
(12,620
)
Net income
74,177

 
48,729

Net income attributable to non-controlling interest
—

 
3,622

Net income attributable to Columbia Sportswear Company
$
74,177

 
$
45,107

Earnings per share attributable to Columbia Sportswear Company (Note 12):
 
 
 
Basic
$
1.09

 
$
0.64

Diluted
$
1.07

 
$
0.64

Weighted average shares outstanding (Note 12):
 
 
 
Basic
68,290

 
70,080

Diluted
69,052

 
70,843

See accompanying notes to condensed consolidated financial statements.


3
Table of Contents

COLUMBIA SPORTSWEAR COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
Three Months Ended March 31,
 
2019
 
2018
Net income
$
74,177

 
$
48,729

Other comprehensive income:
 
 
 
Unrealized holding gains on available-for-sale securities, net
56

 
4

Unrealized gains (losses) on derivative transactions (net of tax effects of $(395), and $1,385, respectively)
1,333

 
(4,907
)
Foreign currency translation adjustments (net of tax effects of $663 and $(1,544), respectively)
(545
)
 
6,259

Other comprehensive income
844

 
1,356

Comprehensive income
75,021

 
50,085

Comprehensive income attributable to non-controlling interest
—

 
4,525

Comprehensive income attributable to Columbia Sportswear Company
$
75,021

 
$
45,560

See accompanying notes to condensed consolidated financial statements.


4
Table of Contents

COLUMBIA SPORTSWEAR COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Three Months Ended March 31,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income
$
74,177

 
$
48,729

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation, amortization, and non-cash lease expense
28,998

 
14,536

Loss on disposal or impairment of property, plant, and equipment
958

 
20

Deferred income taxes
191

 
3,252

Stock-based compensation
4,215

 
3,113

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
108,637

 
115,414

Inventories
862

 
32,133

Prepaid expenses and other current assets
6,952

 
(1,912
)
Other assets
(3,394
)
 
(2,340
)
Accounts payable
(81,242
)
 
(87,492
)
Accrued liabilities
(54,723
)
 
(45,000
)
Income taxes payable
(13,761
)
 
(6,038
)
Operating lease liabilities
(14,721
)
 
—

Other liabilities
1,495

 
2,937

Net cash provided by operating activities
58,644

 
77,352

Cash flows from investing activities:
 
 
 
Purchases of short-term investments
(136,257
)
 
(33,178
)
Sales and maturities of short-term investments
128,000

 
37,121

Capital expenditures
(25,199
)
 
(12,290
)
Proceeds from sale of property, plant, and equipment
—

 
19

Net cash used in investing activities
(33,456
)
 
(8,328
)
Cash flows from financing activities:
 
 
 
Proceeds from credit facilities
21,942

 
—

Repayments on credit facilities
(21,942
)
 
—

Proceeds from issuance of common stock related to stock-based compensation
8,579

 
9,380

Tax payments related to stock-based compensation
(5,432
)
 
(4,033
)
Repurchase of common stock
(18,845
)
 
(18,099
)
Purchase of non-controlling interest
(13,970
)
 
—

Cash dividends paid
(16,418
)
 
(15,452
)
Net cash used in financing activities
(46,086
)
 
(28,204
)
Net effect of exchange rate changes on cash
(450
)
 
3,230

Net increase (decrease) in cash, cash equivalents and restricted cash
(21,348
)
 
44,050

Cash, cash equivalents and restricted cash, beginning of period
451,795

 
673,166

Cash, cash equivalents and restricted cash, end of period
$
430,447

 
$
717,216

Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for income taxes
$
31,646

 
$
24,510

Supplemental disclosures of non-cash investing activities:
 
 
 
Capital expenditures incurred but not yet paid
$
8,177

 
$
4,000

See accompanying notes to condensed consolidated financial statements.

5
Table of Contents

COLUMBIA SPORTSWEAR COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(In thousands)
(Unaudited)
 
 
Three Months Ended March 31, 2019
 
 
Columbia Sportswear Company Shareholders' Equity
 
 
 
 
 
 
Common Stock
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Non-Controlling Interest
 
Total
 
Shares
Outstanding
 
Amount
BALANCE, DECEMBER 31, 2018
 
68,246

 
$
—

 
$
1,677,920

 
$
(4,063
)
 
$
16,456

 
$
1,690,313

Net income
 
—

 
—

 
74,177

 
—

 
—

 
74,177

Purchase of non-controlling interest
 
—

 
—

 
—

 
(99
)
 
(16,456
)
 
(16,555
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized holding gains on available-for-sale securities, net
 
—

 
—

 
—

 
56

 
—

 
56

Unrealized holding gains on derivative transactions, net
 
—

 
—

 
—

 
1,333

 
—

 
1,333

Foreign currency translation adjustment, net
 
—

 
—

 
—

 
(545
)
 
—

 
(545
)
Cash dividends ($0.24 per share)
 
—

 
—

 
(16,418
)
 
—

 
—

 
(16,418
)
Issuance of common stock related to stock-based compensation, net
 
296

 
3,147

 
—

 
—

 
—

 
3,147

Stock-based compensation expense
 
—

 
4,215

 
—

 
—

 
—

 
4,215

Repurchase of common stock
 
(196
)
 
(7,268
)
 
(11,806
)
 
—

 
—

 
(19,074
)
BALANCE, MARCH 31, 2019
 
68,346

 
$
94

 
$
1,723,873

 
$
(3,318
)
 
$
—

 
$
1,720,649

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2018
 
 
Columbia Sportswear Company Shareholders' Equity
 
 
 
 
 
 
Common Stock
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Non-Controlling Interest
 
Total
 
Shares
Outstanding
 
Amount
BALANCE, DECEMBER 31, 2017
 
69,995

 
$
45,829

 
$
1,585,009

 
$
(8,887
)
 
$
30,308

 
$
1,652,259

Net income
 
—

 
—

 
45,107

 
—

 
3,622

 
48,729

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized holding gains on available-for-sale securities, net
 
—

 
—

 
—

 
4

 
—

 
4

Unrealized holding losses on derivative transactions, net
 
—

 
—

 
—

 
(4,570
)
 
(337
)
 
(4,907
)
Foreign currency translation adjustment, net
 
—

 
—

 
—

 
5,019

 
1,240

 
6,259

Adoption of new accounting standards
 
—

 
—

 
14,615

 
(515
)
 
—

 
14,100

Cash dividends ($0.22 per share)
 
—

 
—

 
(15,452
)
 
—

 
—

 
(15,452
)
Issuance of common stock related to stock-based compensation, net
 
353

 
5,347

 
—

 
—

 
—

 
5,347

Stock-based compensation expense
 
—

 
3,113

 
—

 
—

 
—

 
3,113

Repurchase of common stock
 
(235
)
 
(18,099
)
 
—

 
—

 
—

 
(18,099
)
BALANCE, MARCH 31, 2018
 
70,113

 
$
36,190

 
$
1,629,279

 
$
(8,949
)
 
$
34,833

 
$
1,691,353

See accompanying notes to condensed consolidated financial statements.


6
Table of Contents

COLUMBIA SPORTSWEAR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1—BASIS OF PRESENTATION AND ORGANIZATION
The accompanying condensed consolidated financial statements have been prepared by the management of Columbia Sportswear Company (together with its wholly owned subsidiaries and entities in which it maintains a controlling financial interest, the "Company") and in the opinion of management include all normal recurring material adjustments necessary to present fairly the Company's financial position as of March 31, 2019, December 31, 2018 and March 31, 2018, and the results of operations and cash flows for the three months ended March 31, 2019 and 2018. The December 31, 2018 financial information was derived from the Company's audited financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018. A significant part of the Company's business is of a seasonal nature; therefore, results of operations for the three months ended March 31, 2019 are not necessarily indicative of results to be expected for other quarterly periods or for the full year.
In accordance with the Disclosure Modernization and Simplification final rule issued by the Securities and Exchange Commission ("SEC") and effective for the Company during the quarter ended March 31, 2019, a reconciliation of the changes of shareholders' equity is presented for all periods for which the results of operations are presented.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted pursuant to the rules and regulations of the SEC. The Company, however, believes that the disclosures contained in this report comply with the requirements of Section 13(a) of the Securities Exchange Act of 1934 for a Quarterly Report on Form 10-Q and are adequate to make the information presented not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of Columbia Sportswear Company, its wholly owned subsidiaries and entities in which it maintains a controlling financial interest. All significant intercompany balances and transactions have been eliminated in consolidation.
Estimates and Assumptions
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates and assumptions. Some of these more significant estimates relate to revenue recognition, including sales returns and claims from customers, allowance for doubtful accounts, provisions for potential excess, slow-moving and closeout inventories, product warranty, long-lived and intangible assets, goodwill, income taxes, and stock-based compensation.
NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Except as disclosed below and in Note 8, pertaining to our adoption of new accounting pronouncements, there have been no significant changes to the Company's significant accounting policies as described in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.
Recently Adopted Accounting Pronouncements
On January 1, 2019, the Company adopted Accounting Standards Update ("ASU") No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accounting for share-based payments granted to nonemployees for goods and services. Under the ASU, most of the guidance on such payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. The adoption of this provision did not have a material effect on the Company's financial position, results of operations or cash flows.
On January 1, 2019, the Company adopted ASU No. 2016-02, Leases ("ASC 842"), which increased transparency and comparability among organizations by recognizing right-of-use ("ROU") assets and lease liabilities on the balance sheet for most leases previously classified as operating leases. The updated guidance, and subsequent clarifications requires disclosures to meet the objective of enabling users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases.
The Company adopted this standard utilizing the modified retrospective approach. The comparative prior period information has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company has elected to adopt the package of transition practical expedients and, therefore, has not reassessed (1) whether existing or expired contracts contain a lease, (2) lease classification for existing or expired leases or (3) the accounting for initial direct costs that were previously capitalized. The Company did not elect the practical expedient to use hindsight for leases existing at adoption date.

7
Table of Contents
COLUMBIA SPORTSWEAR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


The adoption of ASC 842 resulted in the recognition of ROU assets of $352.7 million, with corresponding lease liabilities of $387.1 million. As a result of adopting the standard, $34.4 million of pre-existing liabilities for deferred rent and various lease incentives were reclassified as a component of the ROU assets. At adoption, the measurement of the lease liabilities utilized the remaining minimum rental payments as defined under the previous accounting standard and the incremental borrowing rate as of January 1, 2019.
The adoption of ASC 842 did not materially impact the Condensed Consolidated Statements of Operations. Also, the adoption of ASC 842 had no material impact on operating, investing or financing cash flows in the Condensed Consolidated Statements of Cash Flows. See Note 8 for additional disclosure regarding the adoption of the new standard.
The following table presents the effect of the adoption of ASC 842 on our Condensed Consolidated Balance Sheets as of January 1, 2019:
 
 
January 1, 2019
(in thousands)
 
December 31, 2018
 
Adjustments due to ASC 842
 
January 1, 2019
Operating lease right-of-use assets
 
$
—

 
$
352,679

 
$
352,679

Total assets
 
2,368,721

 
352,679

 
2,721,400

Accrued liabilities
 
275,684

 
(3,346
)
 
272,338

Operating lease liabilities
 
—

 
57,207

 
57,207

Current liabilities
 
572,882

 
53,861

 
626,743

Non-current operating lease liabilities
 
—

 
329,865

 
329,865

Other long-term liabilities
 
45,214

 
(31,047
)
 
14,167

Total liabilities
 
678,408

 
352,679

 
1,031,087

Total liabilities and equity
 
2,368,721

 
352,679

 
2,721,400

Recent Accounting Pronouncements Not Yet Adopted
In August 2018, the Financial Accounting Standards Board ("FASB") issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40), which clarifies certain aspects of accounting for implementation costs incurred in a cloud computing arrangement ("CCA") that is a service contract. Under the ASU, an entity would expense costs incurred in the preliminary-project and post-implementation-operation stages. The entity would also capitalize certain costs incurred during the application-development stage, as well as certain costs related to enhancements. The ASU does not change the accounting for the service component of a CCA. This standard is effective beginning in the first quarter of 2020, with early adoption permitted. The Company is currently evaluating the impact this accounting standard will have on the Company's financial position, results of operations or cash flows.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies the accounting for goodwill impairments by eliminating step two from the goodwill impairment test. Under this guidance, if the carrying amount of a reporting unit exceeds its estimated fair value, an impairment charge shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. This standard is effective beginning in the first quarter of 2020, with early adoption permitted. The impact of the new standard will depend on the specific facts and circumstances of future individual goodwill impairments, if any.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The pronouncement changes the impairment model for most financial assets and will require the use of an "expected loss" model for instruments measured at amortized cost. Under this model, entities will be required to estimate the lifetime expected credit loss on such instruments and record an allowance to offset the amortized cost basis of the financial asset, resulting in a net presentation of the amount expected to be collected on the financial asset. Subsequently, the FASB issued an amendment to clarify the implementation dates and items that fall within the scope of this pronouncement. This standard is effective beginning in the first quarter of 2020. The adoption of ASU 2016-13 is not expected to have a material effect on the Company's financial position, results of operations or cash flows.
NOTE 3—REVENUES
Disaggregated Revenue
As disclosed below in Note 14, the Company has aggregated its operating segments into four geographic segments: (1) the United States, (2) Latin America and Asia Pacific ("LAAP"), (3) Europe, Middle East and Africa ("EMEA"), and (4) Canada.

8
Table of Contents
COLUMBIA SPORTSWEAR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


The following tables disaggregate the Company's operating segment Net sales by product category and sales channel, which the Company believes provide a meaningful depiction of how the nature, timing, and uncertainty of Net sales are affected by economic factors:
 
 
Three Months Ended March 31, 2019
(in thousands)
 
United States
 
LAAP
 
EMEA
 
Canada
 
Total
Product category net sales
 
 
 
 
 
 
 
 
 
 
Apparel, Accessories and Equipment
 
$
344,705

 
$
100,337

 
$
50,701

 
$
30,224

 
$
525,967

Footwear
 
67,519

 
32,522

 
20,647

 
7,953

 
128,641

Total
 
$
412,224

 
$
132,859

 
$
71,348

 
$
38,177

 
$
654,608

Sales channel net sales
 
 
 
 
 
 
 
 
 
 
Wholesale
 
$
208,569

 
$
70,978

 
$
56,369

 
$
27,242

 
$
363,158

Direct-to-consumer
 
203,655

 
61,881

 
14,979

 
10,935

 
291,450

Total
 
$
412,224

 
$
132,859

 
$
71,348

 
$
38,177

 
$
654,608

 
 
Three Months Ended March 31, 2018
(in thousands)
 
United States
 
LAAP
 
EMEA
 
Canada
 
Total
Product category net sales
 
 
 
 
 
 
 
 
 
 
Apparel, Accessories and Equipment
 
$
313,326

 
$
96,380

 
$
47,475

 
$
32,778

 
$
489,959

Footwear
 
49,518

 
35,189

 
24,300

 
8,342

 
117,349

Total
 
$
362,844

 
$
131,569

 
$
71,775

 
$
41,120

 
$
607,308

Sales channel net sales
 
 
 
 
 
 
 
 
 
 
Wholesale
 
$
186,840

 
$
71,919

 
$
57,581

 
$
31,331

 
$
347,671

Direct-to-consumer
 
176,004

 
59,650

 
14,194

 
9,789

 
259,637

Total
 
$
362,844

 
$
131,569

 
$
71,775

 
$
41,120

 
$
607,308

During the fourth quarter of 2018, the Company determined that it had understated wholesale and overstated direct-to-consumer ("DTC") net sales by $3.7 million, respectively, in the LAAP segment for the three months ended March 31, 2018, with no effect on LAAP segment total net sales. The Company assessed the significance of the misclassifications and concluded that they were not material to any prior periods. As a result, the LAAP segment wholesale and DTC net sales for the three months ended March 31, 2018 in the table above have been revised from amounts previously reported to correct the misclassifications. These corrections had no effect on the Company's Condensed Consolidated Statements of Operations.
Performance Obligations
For the three months ended March 31, 2019 and 2018, Net sales recognized from performance obligations related to prior periods was not material. Net sales expected to be recognized in any future period related to remaining performance obligations are not material.
Contract Balances
As of March 31, 2019, December 31, 2018 and March 31, 2018, contract liabilities recorded as Accrued liabilities on the Condensed Consolidated Balance Sheets, which consisted of obligations associated with our gift card and customer loyalty programs, were not material.
NOTE 4—NON-CONTROLLING INTEREST
Prior to January 2, 2019, the Company owned a 60% controlling interest in a joint venture formed with Swire Resources Limited ("Swire") to support the development and operation of the Company's business in China. The accounts of the joint venture were included in the condensed consolidated financial statements. Swire's share of net income from the joint venture was included in Net income attributable to non-controlling interest in the Condensed Consolidated Statements of Operations and the non-controlling equity interest in this entity was included in total equity as Non-controlling interest in the Condensed Consolidated Balance Sheets.
In September 2018, the Company and Swire entered into an Equity Interest Transfer Agreement ("EITA"), under which the Company committed to buy out the 40% non-controlling interest in the joint venture. On January 2, 2019, the Company closed the buyout. As a result of the buyout, the 2019 condensed consolidated financial statements of the Company do not separately reflect amounts related to the non-controlling interest. See Note 17 for additional information regarding the various terms and conditions and resulting related-party transactions.

9
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COLUMBIA SPORTSWEAR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


NOTE 5—INTANGIBLE ASSETS, NET
The following table summarizes the Company's identifiable Intangible assets, net balance:
(in thousands)
 
March 31,
2019
 
December 31,
2018
 
March 31,
2018
Intangible assets subject to amortization:
 
 
 
 
 
 
Patents and purchased technology
 
$
14,198

 
$
14,198

 
$
14,198

Customer relationships
 
23,000

 
23,000

 
23,000

Gross carrying amount
 
37,198

 
37,198

 
37,198

Accumulated amortization:
 
 
 
 
 
 
Patents and purchased technology
 
(12,314
)
 
(11,981
)
 
(10,984
)
Customer relationships
 
(14,475
)
 
(14,063
)
 
(12,825
)
Total accumulated amortization
 
(26,789
)
 
(26,044
)
 
(23,809
)
Net carrying amount
 
10,409

 
11,154

 
13,389

Intangible assets not subject to amortization
 
115,421

 
115,421

 
115,421

Intangible assets, net
 
$
125,830

 
$
126,575

 
$
128,810

Amortization expense for intangible assets subject to amortization was approximately $0.7 million for each of the three months ended March 31, 2019 and 2018.
Annual amortization expense is estimated to be as follows for the years 2019 through 2023:
(in thousands)
 
2019
$
2,980

2020
2,537

2021
1,650

2022
1,650

2023
1,650

NOTE 6—SHORT-TERM BORROWINGS AND CREDIT LINES
The Company had an unsecured, committed revolving line of credit agreement, maturing on July 1, 2021, with monthly variable commitments available for funding that, as of March 31, 2019, averaged $100.0 million over the course of a calendar year. At March 31, 2019, the Company was in compliance with all associated covenants. At March 31, 2019, December 31, 2018 and March 31, 2018, no balance was outstanding under this line of credit. On April 17, 2019, the Company amended and restated its unsecured, committed revolving line of credit agreement to reduce the monthly variable commitments available for funding to an average of $50.0 million over the course of a calendar year. The maturity date of this amended and restated agreement is August 1, 2023. Interest, payable monthly, continues to be based on the Company's applicable funded debt ratio, which could range from USD LIBOR plus 87.5 basis points to USD LIBOR plus 162.5 basis points. The amended and restated agreement requires the Company to comply with certain financial covenants covering the Company's funded debt ratio and interest coverage ratio, and eliminates the previous requirements that covered net income, fixed coverage ratio and borrowing basis. If the Company is in default, it is prohibited from paying dividends or repurchasing common stock.
The Company's European subsidiary has available two separate unsecured and uncommitted lines of credit guaranteed by the Company providing for borrowing up to a maximum of €25.8 million and €5.0 million, respectively (combined approximately US$35.0 million), at March 31, 2019. The line of credit with a maximum borrowing of €5.0 million accrues interest based on the Euro Overnight Index Average plus 75 basis points. During the first quarter of 2019, the interest rate on the line of credit with a maximum borrowing of €25.8 million was modified to accrue interest based on the European Central Bank refinancing rate plus 75 basis points. There was no balance outstanding under either of these lines of credit at March 31, 2019, December 31, 2018 and March 31, 2018.
Except as disclosed above, there have been no significant changes to the Company's short-term borrowing and credit lines as described in Note 9 in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.
NOTE 7—PRODUCT WARRANTY
Some of the Company's products carry assurance-type limited warranty provisions for defects in quality and workmanship. A warranty reserve is established at the time of sale to cover estimated costs based on the Company's history of warranty repairs, replacements and refunds and

10
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COLUMBIA SPORTSWEAR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


is recorded in Cost of sales in the Condensed Consolidated Statements of Operations. The warranty reserve is included in Accrued liabilities in the Condensed Consolidated Balance Sheets.
A reconciliation of product warranties is as follows:
 
 
Three Months Ended March 31,
(in thousands)
 
2019
 
2018
Balance at beginning of period
 
$
13,186

 
$
12,339

Provision for warranty claims
 
1,791

 
1,248

Warranty claims
 
(1,723
)
 
(1,589
)
Other
 
(76
)
 
68

Balance at end of period
 
$
13,178

 
$
12,066

NOTE 8—LEASES
The Company leases, among other things, retail space, office space, warehouse facilities, storage space, vehicles, and equipment. Generally, the base lease terms are between 5 and 10 years. Certain lease agreements contain scheduled rent escalation clauses and others include rental payments adjusted periodically depending on an index or rate. Certain retail space lease agreements provide for additional rents based on a percentage of annual sales in excess of stipulated minimums ("percentage rent"). Certain lease agreements require the Company to pay real estate taxes, insurance, common area maintenance, and other costs, collectively referred to as operating costs, in addition to base rent. Certain lease agreements also contain lease incentives, such as tenant improvement allowances and rent holidays. Most leases include one or more options to renew, with renewal terms that can extend the lease term from one to 10 years or more. The exercise of lease renewal options is generally at the Company's sole discretion. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The Company determines if an arrangement is or contains a lease at contract inception. The Company recognizes a ROU asset and a lease liability at the lease commencement date. The lease liability is initially measured at the present value of the unpaid lease payments at the lease commencement date. Key estimates and judgments include how the Company determines (1) the discount rate it uses to discount the unpaid lease payments to present value, (2) the lease term and (3) lease payments.
ASC 842 requires a lessee to discount its unpaid lease payments using the interest rate implicit in the lease or, if that rate cannot be readily determined, its incremental borrowing rate. Generally, the Company cannot determine the interest rate implicit in the lease because it does not have access to the lessor's estimated residual value or the amount of the lessor's deferred initial direct costs. Therefore, the Company generally uses its incremental borrowing rate as the discount rate for the lease. The Company's incremental borrowing rate for a lease is the rate of interest it would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. Because the Company does not generally borrow on a collateralized basis, it uses quoted interest rates obtained from financial institutions as an input to derive an appropriate incremental borrowing rate, adjusted for the amount of the lease payments, the lease term and the effect on that rate of designating specific collateral with a value equal to the unpaid lease payments for that lease.
The Company's lease contracts may include options to extend the lease following the initial term or terminate the lease prior to the end of the initial term. In most instances, at the commencement of the leases, the Company has determined that it is not reasonably certain to exercise either of these options; accordingly, these options are generally not considered in determining the initial lease term. At the renewal of an expiring lease, the Company reassesses options in the contract that it is reasonably certain to exercise in its measurement of lease term.
For lease agreements entered into or reassessed after the adoption of ASC 842, the Company has elected the practical expedient to account for the lease and non-lease components as a single lease component. Therefore, for those leases, the lease payments used to measure the lease liability include all of the fixed consideration in the contract.
Variable lease payments associated with the Company's leases are recognized upon occurrence of the event, activity, or circumstance in the lease agreement on which those payments are assessed. Variable lease payments are presented as operating expense in the Company's Condensed Consolidated Statements of Operations in the same line item as expense arising from fixed lease payments.
Leases with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term.

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COLUMBIA SPORTSWEAR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


The components of lease cost for the quarter ended March 31, 2019 were as follows:
(in thousands)
 
 
Operating lease cost
 
$
18,579

Variable lease cost
 
13,113

Short term lease cost
 
956

 
 
$
32,648

Other information related to leases as of March 31, 2019 is as follows:
(dollars in thousands)
 
 
Cash paid for amounts included in the measurement of operating lease liabilities
 
$
18,391

Operating lease liabilities arising from obtaining ROU assets (1)
 
$
412,130

Reductions to ROU assets resulting from reductions to operating lease liabilities
 
$
462

Weighted average remaining lease term
 
6.97 years

Weighted average discount rate
 
4.09
%
(1) Includes amount initially capitalized in conjunction with the adoption of ASC 842.
Amounts disclosed for lease liabilities arising from obtaining ROU assets include amounts added to the carrying amount of lease liabilities resulting from lease modifications and reassessments.
As of March 31, 2019, future maturities of lease liabilities are as follows:
(in thousands)
 
 
2019
 
$
56,274

2020
 
68,962

2021
 
61,194

2022
 
56,408

2023
 
51,764

Thereafter
 
167,800

Total lease payments
 
462,402

Less: imputed interest
 
(65,356
)
Total lease liabilities
 
397,046

Less: current obligations
 
(59,214
)
Long-term lease obligations
 
$
337,832

As of March 31, 2019, the Company has additional operating lease commitments that have not yet commenced of approximately $12.7 million. These leases will commence in 2019 with lease terms of 10 years.
Disclosures related to periods prior to adoption of ASC 842
Information on rent expense for the quarter ended March 31, 2018 was as follows:
(in thousands)
 
 
Rent expense included in SG&A expense
 
$
32,924

Rent expense included in Cost of sales
 
400

 
 
$
33,324


12
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COLUMBIA SPORTSWEAR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


Future minimum payments determined under the previous accounting standards for all lease obligations, including rent escalation clauses and committed leases that had not yet commenced, at December 31, 2018, were as follows:
(in thousands)
 
 
2019
 
$
72,280

2020
 
65,379

2021
 
57,460

2022
 
52,607

2023
 
47,837

Thereafter
 
155,897

 
 
$
451,460

NOTE 9—COMMITMENTS AND CONTINGENCIES
Inventory Purchase Obligations
Inventory purchase obligations consist of open production purchase orders and other commitments for raw materials and sourced apparel, footwear, accessories, and equipment. At March 31, 2019, inventory purchase obligations were $645.2 million.
Litigation
The Company is a party to various legal claims, actions and complaints from time to time. Although the ultimate resolution of legal proceedings cannot be predicted with certainty, management believes that disposition of these matters will not have a material adverse effect on the Company's condensed consolidated financial statements.
NOTE 10—SHAREHOLDERS' EQUITY
During the three months ended March 31, 2019, the Company repurchased an aggregate of $19.1 million of common stock under the stock repurchase plan authorized by the Company's Board of Directors. During the three months ended March 31, 2018, the Company repurchased an aggregate of $18.1 million of common stock under the stock repurchase plan. Of the shares repurchased during the three months ended March 31, 2019, a portion settled in April 2019. Shares of the Company's common stock may be repurchased in the open market or through privately negotiated transactions, subject to market conditions. The repurchase program does not obligate the Company to acquire any specific number of shares or to acquire shares over any specified period of time.
NOTE 11—STOCK-BASED COMPENSATION
The Company's stock incentive plan allows for grants of incentive stock options, non-statutory stock options, restricted stock awards, restricted stock units and other stock-based or cash-based awards. See Note 16 in the Company's Annual Report on Form 10-K for the year ended December 31, 2018 for additional information concerning its stock-based compensation.
Stock-based compensation expense consisted of the following:
 
 
Three Months Ended March 31,
(in thousands)
 
2019
 
2018
Stock options
 
$
1,489

 
$
1,072

Restricted stock units
 
2,726

 
2,041

Total
 
$
4,215

 
$
3,113

Stock Options
During the three months ended March 31, 2019, the Company granted a total of 365,489 stock options at a weighted average grant date fair value of $22.26. At March 31, 2019, unrecognized costs related to outstanding stock options totaled $14.2 million, before any related tax benefit. The unrecognized costs related to stock options are amortized over the related vesting period using the straight-line attribution method. Unrecognized costs related to stock options at March 31, 2019 are expected to be recognized over a weighted average period of 2.82 years.
Restricted Stock Units
During the three months ended March 31, 2019, the Company granted 160,500 restricted stock units at an estimated average grant date fair value of $95.58. At March 31, 2019, unrecognized costs related to outstanding restricted stock units totaled approximately $27.2 million, before any related tax benefit. The unrecognized costs related to restricted stock units are being amortized over the related vesting period using the

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COLUMBIA SPORTSWEAR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


straight-line attribution method. These unrecognized costs at March 31, 2019 are expected to be recognized over a weighted average period of 2.74 years.
NOTE 12—EARNINGS PER SHARE
Earnings per share ("EPS") is presented on both a basic and diluted basis. Basic EPS is based on the weighted average number of common shares outstanding. Diluted EPS reflects the potential dilution that could occur if outstanding securities or other contracts to issue common stock were exercised or converted into common stock.
A reconciliation of common shares used in the denominator for computing basic and diluted EPS is as follows:
 
 
Three Months Ended March 31,
(in thousands, except per share amounts)
 
2019
 
2018
Weighted average shares of common stock outstanding, used in computing basic earnings per share
 
68,290

 
70,080

Effect of dilutive stock options and restricted stock units
 
762

 
763

Weighted average shares of common stock outstanding, used in computing diluted earnings per share
 
69,052

 
70,843

Earnings per share of common stock attributable to Columbia Sportswear Company:
 
 
 
 
Basic
 
$
1.09

 
$
0.64

Diluted
 
$
1.07

 
$
0.64

Stock options, service-based restricted stock units, and performance-based restricted stock representing 325,226 and 227,155 shares of common stock for the three months ended March 31, 2019 and 2018, respectively, were outstanding but were excluded from the computation of diluted EPS because their effect would be anti-dilutive under the treasury stock method, or because the shares were subject to performance conditions that had not been met.
NOTE 13—ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss, net of applicable taxes, reported on the Company's Condensed Consolidated Balance Sheets consists of unrealized holding gains and losses on available-for-sale securities, unrealized gains and losses on certain derivative transactions and foreign currency translation adjustments.
The following table sets forth the changes in accumulated other comprehensive loss attributable to Columbia Sportswear Company, net of tax, for the three months ended March 31, 2019:
(in thousands)
 
Unrealized gains (losses) on available-for-sale securities
 
Unrealized holding gains (losses) on derivative transactions
 
Foreign currency translation adjustments
 
Total
Balance at December 31, 2018
 
$
(60
)
 
$
11,964

 
$
(15,967
)
 
$
(4,063
)
Other comprehensive income (loss) before reclassifications
 
56

 
3,268

 
(545
)
 
2,779

Amounts reclassified from other comprehensive loss
 
—

 
(1,935
)
 
—

 
(1,935
)
Net other comprehensive income (loss) income during the period
 
56

 
1,333

 
(545
)
 
844

Purchase of non-controlling interest
 
—

 
(99
)
 
—

 
(99
)
Balance at March 31, 2019
 
$
(4
)
 
$
13,198

 
$
(16,512
)
 
$
(3,318
)
 
 
 
 
 
 
 
 

14
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COLUMBIA SPORTSWEAR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


The following table sets forth the changes in accumulated other comprehensive loss attributable to Columbia Sportswear Company, net of tax, for the three months ended March 31, 2018:
(in thousands)
 
Unrealized gains (losses) on available-for-sale securities
 
Unrealized holding gains (losses) on derivative transactions
 
Foreign currency translation adjustments
 
Total
Balance at December 31, 2017
 
$
(4
)
 
$
(10,716
)
 
$
1,833

 
$
(8,887
)
Other comprehensive income (loss) before reclassifications
 
4

 
(4,582
)
 
5,019

 
441

Amounts reclassified from other comprehensive loss
 
—

 
12

 
—

 
12

Net other comprehensive income (loss) income during the period
 
4

 
(4,570
)
 
5,019

 
453

Adoption of ASU 2017-12
 
—

 
(515
)
 
—

 
(515
)
Balance at March 31, 2018
 
$
—

 
$
(15,801
)
 
$
6,852

 
$
(8,949
)
 
 
 
 
 
 
 
 
NOTE 14—SEGMENT INFORMATION
The Company has aggregated its operating segments into four reportable geographic segments: (1) the United States, (2) LAAP, (3) EMEA, and (4) Canada, which are reflective of the Company's internal organization, management and oversight structure. Each geographic segment operates predominantly in one industry: the design, development, marketing and distribution of outdoor and active lifestyle apparel, footwear, accessories, and equipment. Intersegment net sales and intersegment profits, which are recorded at a negotiated mark-up and eliminated in consolidation, are not material. Unallocated corporate expenses consist of expenses incurred by centrally-managed departments, including global information systems, finance, human resources and legal, executive compensation, unallocated benefit program expense, and other miscellaneous costs.
The geographic distribution of the Company's Net sales and Income from operations in the Condensed Consolidated Statements of Operations are summarized in the following table for the three months ended March 31, 2019 and 2018.
 
 
Three Months Ended March 31,
(in thousands)
 
2019
 
2018
Net sales to unrelated entities:
 
 
 
 
United States
 
$
412,224

 
$
362,844

LAAP
 
132,859

 
131,569

EMEA
 
71,348

 
71,775

Canada
 
38,177

 
41,120

 
 
$
654,608

 
$
607,308

Segment income from operations:
 
 
 
 
United States
 
$
95,723

 
$
75,830

LAAP
 
26,750

 
24,118

EMEA
 
9,186

 
6,648

Canada
 
6,011

 
6,242

Total segment income from operations
 
137,670

 
112,838

Unallocated corporate expenses
 
(49,712
)
 
(53,517
)
Interest income, net
 
3,400

 
2,296

Other non-operating income (expense)
 
446

 
(268
)
Income before income taxes
 
$
91,804

 
$
61,349

During the fourth quarter of 2018, the Company revised its methodology for allocating certain expenses to its reportable segments to better reflect how management reviews financial information and makes operating decisions. As a result, prior year balances for segment income from operations for each reportable segment, and unallocated corporate expenses in the table above have been reclassified to conform with the current year's presentation.
In addition, during the fourth quarter of 2018, the Company determined that it had incorrectly allocated certain amounts of operating income to its United States segment, resulting in the overstatement of both total segment income from operations and unallocated corporate expenses by $3.1 million for the three months ended March 31, 2018. The Company assessed the significance of the misclassifications and concluded that

15
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COLUMBIA SPORTSWEAR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


they were not material to any prior periods. As a result, the United States and total segment income from operations as well as unallocated corporate expenses for the three months ended March 31, 2018 in the table above have been revised from amounts previously reported to correct the misclassifications. These corrections had no effect on the Company's Condensed Consolidated Statements of Operations.
Concentrations
No single customer accounted for 10% or more of Accounts receivable, net of allowance as of March 31, 2019 and 2018. The Company had one customer that accounted for 11.6% of Accounts receivable, net of allowance as of December 31, 2018. No single customer accounted for 10% or more of Net sales in the Condensed Consolidated Statements of Operations for the three months ended March 31, 2019 or 2018, or for the year ended December 31, 2018.
NOTE 15—FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
In the normal course of business, the Company's financial position, results of operations and cash flows are routinely subject to a variety of risks. These risks include risks associated with financial markets, primarily currency exchange rate risk and, to a lesser extent, interest rate risk and equity market risk. The Company regularly assesses these risks and has established policies and business practices designed to mitigate them. The Company does not engage in speculative trading in any financial market.
The Company actively manages the risk of changes in functional currency equivalent cash flows resulting from anticipated non-functional currency denominated purchases and sales. Subsidiaries that use European euros, Canadian dollars, Japanese yen, Chinese renminbi, or Korean won as their functional currency are primarily exposed to changes in functional currency equivalent cash flows from anticipated U.S. dollar inventory purchases. Subsidiaries that use U.S. dollars and euros as their functional currency also have non-functional currency denominated sales for which the Company hedges the Canadian dollar and Great British pound. The Company manages these risks by using currency forward contracts formally designated and effective as cash flow hedges. Hedge effectiveness is generally determined by evaluating the ability of a hedging instrument's cumulative change in fair value to offset the cumulative change in the present value of expected cash flows on the underlying exposures. For forward contracts, forward points are excluded from the determination of hedge effectiveness and are included in current period Cost of sales for hedges of anticipated U.S. dollar inventory purchases and in Net sales for hedges of anticipated non-functional currency denominated sales on a straight-line basis over the life of the contract. In each accounting period, any difference between the change in fair value of the forward points and the amount recognized in earnings on a straight-line basis is recognized in Other comprehensive loss in the Condensed Consolidated Statements of Comprehensive Income. Hedge ineffectiveness was not material during the three months ended March 31, 2019 and 2018.
The Company also uses currency forward contracts not formally designated as hedges to manage the consolidated currency exchange rate risk associated with the remeasurement of non-functional currency denominated monetary assets and liabilities by subsidiaries that use U.S. dollars, euros, Canadian dollars, yen, won, or renminbi as their functional currency. Non-functional currency denominated monetary assets and liabilities consist primarily of cash and cash equivalents, short-term investments, receivables, payables, deferred income taxes, and intercompany loans. The gains and losses generated on these currency forward contracts not formally designated as hedges are expected to be largely offset in Other non-operating expense, net by the gains and losses generated from the remeasurement of the non-functional currency denominated monetary assets and liabilities.
The following table presents the gross notional amount of outstanding derivative instruments: 
(in thousands)
 
March 31,
2019
 
December 31,
2018
 
March 31,
2018
Derivative instruments designated as cash flow hedges:
 
 
 
 
 
 
Currency forward contracts
 
$
399,068

 
$
399,348

 
$
584,107

Derivative instruments not designated as cash flow hedges:
 
 
 
 
 
 
Currency forward contracts
 
208,941

 
379,701

 
234,579

At March 31, 2019, $10.6 million of deferred net gains on both outstanding and matured derivatives recorded in Other comprehensive loss are expected to be reclassified to Net income during the next twelve months as a result of underlying hedged transactions also being recorded in Net sales or Cost of sales in the Condensed Consolidated Statements of Operations. Actual amounts ultimately reclassified to Net sales or Cost of sales in the Condensed Consolidated Statements of Comprehensive Income are dependent on U.S. dollar exchange rates in effect against the euro, renminbi, Canadian dollar, and yen when outstanding derivative contracts mature.
At March 31, 2019, the Company's derivative contracts had a remaining maturity of less than four years. The maximum net exposure to any single counterparty, which is generally limited to the aggregate unrealized gain of all contracts with that counterparty, was less than $7.0 million at March 31, 2019. All of the Company's derivative counterparties have credit ratings that are at least investment grade or higher. The Company is a party to master netting arrangements that contain features that allow counterparties to net settle amounts arising from multiple separate derivative transactions or net settle amounts arising from multiple separate derivative transactions or net settle in the case of certain triggering

16
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COLUMBIA SPORTSWEAR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


events such as a bankruptcy or major default of one of the counterparties to the transaction. The Company has not pledged assets or posted collateral as a requirement for entering into or maintaining derivative positions.
The following table presents the balance sheet classification and fair value of derivative instruments:
(in thousands)
 
Balance Sheet Classification
 
March 31,
2019
 
December 31,
2018
 
March 31,
2018
Derivative instruments designated as cash flow hedges:
 
 
 
 
 
 
 
 
Derivative instruments in asset positions:
 
 
 
 
 
 
 
 
Currency forward contracts
 
Prepaid expenses and other current assets
 
$
14,366

 
$
11,818

 
$
998

Currency forward contracts
 
Other non-current assets
 
10,014

 
9,922

 
2,492

Derivative instruments in liability positions:
 
 
 
 
 
 
 
 
Currency forward contracts
 
Accrued liabilities
 
149

 
47

 
11,017

Currency forward contracts
 
Other long-term liabilities
 
—

 
1

 
7,294

Derivative instruments not designated as cash flow hedges:
 
 
 
 
 
 
 
 
Derivative instruments in asset positions:
 
 
 
 
 
 
 
 
Currency forward contracts
 
Prepaid expenses and other current assets
 
971

 
1,797

 
1,121

Derivative instruments in liability positions:
 
 
 
 
 
 
 
 
Currency forward contracts
 
Accrued liabilities
 
349

 
970

 
355

The following table presents the statement of operations effect and classification of derivative instruments:
 
 
Statement of
Operations
Classification
 
Three Months Ended March 31,
(in thousands)
 
 
2019
 
2018
Currency Forward and Option Contracts:
 
 
 
 
 
 
Derivative instruments designated as cash flow hedges:
 
 
 
 
Gain (loss) recognized in other comprehensive income, net of tax
 
—
 
$
3,268

 
$
(5,232
)
Gain reclassified from accumulated other comprehensive income to income for the effective portion
 
Net sales
 
35

 
5

Gain (loss) reclassified from accumulated other comprehensive income or loss to income for the effective portion
 
Cost of sales
 
1,196

 
(2,206
)
Gain (loss) recognized in income for amount excluded from effectiveness testing and for the ineffective portion
 
Net sales
 
(5
)
 
6

Gain recognized in income for amount excluded from effectiveness testing and for the ineffective portion
 
Cost of sales
 
1,449

 
1,925

Derivative instruments not designated as cash flow hedges:
 
 
 
 
Gain (loss) recognized in income
 
Other non-operating expense
 
563

 
(602
)
NOTE 16—FAIR VALUE MEASURES
Certain assets and liabilities are reported at fair value on either a recurring or nonrecurring basis. Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, under a three-tier fair value hierarchy that prioritizes the inputs used in measuring fair value as follows:
Level 1 — observable inputs such as quoted prices for identical assets or liabilities in active liquid markets;
Level 2 — inputs, other than the quoted market prices in active markets, that are observable, either directly or indirectly; or observable market prices in markets with insufficient volume or infrequent transactions; and
Level 3 — unobservable inputs for which there is little or no market data available, that require the reporting entity to develop its own assumptions.

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COLUMBIA SPORTSWEAR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


Assets and liabilities measured at fair value on a recurring basis as of March 31, 2019 were as follows:
(in thousands)
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
Money market funds
 
$
125,073

 
$
—

 
$
—

 
$
125,073

Available-for-sale short-term investments (1):
 
 
 
 
 
 
 
 
U.S. Government treasury bills
 
—

 
270,625

 
—

 
270,625

Other short-term investments:
 
 
 
 
 
 
 
 
Mutual fund shares
 
1,978

 
—

 
—

 
1,978

Other current assets:
 
 
 
 
 
 
 
 
Derivative financial instruments (Note 15)
 
—

 
15,337

 
—

 
15,337

Other non-current assets:
 
 
 
 
 
 
 
 
Money market funds
 
1,331

 
—

 
—

 
1,331

Mutual fund shares
 
9,575

 
—

 
—

 
9,575

Derivative financial instruments (Note 15)
 
—

 
10,014

 
—

 
10,014

Total assets measured at fair value
 
$
137,957

 
$
295,976

 
$
—

 
$
433,933

Liabilities:
 
 
 
 
 
 
 
 
Accrued liabilities:
 
 
 
 
 
 
 
 
Derivative financial instruments (Note 15)
 
$
—

 
$
498

 
$
—

 
$
498

Total liabilities measured at fair value
 
$
—

 
$
498

 
$
—

 
$
498

(1) Investments have remaining maturities of less than one year.
Assets and liabilities measured at fair value on a recurring basis as of December 31, 2018 were as follows:
(in thousands)
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
Money market funds
 
$
122,237

 
$
—

 
$
—

 
$
122,237

U.S. Government treasury bills
 
—

 
39,952

 
—

 
39,952

Available-for-sale short-term investments (1)
 
 
 
 
 
 
 
 
U.S. Government treasury bills
 
—

 
261,602

 
—

 
261,602

Other short-term investments:
 
 
 
 
 
 
 
 
Mutual fund shares
 
1,200

 
—

 
—

 
1,200

Other current assets:
 
 
 
 
 
 
 
 
Derivative financial instruments (Note 15)
 
—

 
13,615

 
—

 
13,615

Other non-current assets:
 
 
 
 
 
 
 
 
Money market funds
 
869

 
—

 
—

 
869

Mutual fund shares
 
8,606

 
—

 
—

 
8,606

Derivative financial instruments (Note 15)
 
—

 
9,922

 
—

 
9,922

Total assets measured at fair value
 
$
132,912

 
$
325,091

 
$
—

 
$
458,003

Liabilities:
 
 
 
 
 
 
 
 
Accrued liabilities:
 
 
 
 
 
 
 
 
Derivative financial instruments (Note 15)
 
$
—

 
$
1,017

 
$
—

 
$
1,017

Other long-term liabilities:
 
 
 
 
 
 
 
 
Derivative financial instruments (Note 15)
 
—

 
1

 
—

 
1

Total liabilities measured at fair value
 
$
—

 
$
1,018

 
$
—

 
$
1,018

(1) Investments have remaining maturities of less than one year.

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COLUMBIA SPORTSWEAR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


Assets and liabilities measured at fair value on a recurring basis as of March 31, 2018 were as follows:
(in thousands)
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
Money market funds
 
$
380,136

 
$
—

 
$
—

 
$
380,136

Time deposits
 
55,825

 
—

 
—

 
55,825

U.S. Government treasury bills
 
—

 
34,983

 
—

 
34,983

U.S. Government-backed municipal bonds
 
—

 
4,879

 
—

 
4,879

Available-for-sale short-term investments (1):
 
 
 
 
 
 
 
 
U.S. Government-backed municipal bonds
 
—

 
89,567

 
—

 
89,567

Other short-term investments:
 
 
 
 
 
 
 
 
Mutual funds shares
 
1,411

 
—

 
—

 
1,411

Other current assets:
 
 
 
 
 
 
 
 
Derivative financial instruments (Note 15)
 
—

 
2,119

 
—

 
2,119

Other non-current assets:
 
 
 
 
 
 
 
 
Mutual fund shares
 
8,679

 
—

 
—

 
8,679

Derivative financial instruments (Note 15)
 
—

 
2,492

 
—

 
2,492

Total assets measured at fair value
 
$
446,051

 
$
134,040

 
$
—

 
$
580,091

Liabilities:
 
 
 
 
 
 
 
 
Accrued liabilities:
 
 
 
 
 
 
 
 
Derivative financial instruments (Note 15)
 
$
—

 
$
11,372

 
$
—

 
$
11,372

Other long-term liabilities:
 
 
 
 
 
 
 
 
Derivative financial instruments (Note 15)
 
—

 
7,294

 
—

 
7,294

Total liabilities measured at fair value
 
$
—

 
$
18,666

 
$
—

 
$
18,666

(1) Investments have remaining maturities of less than one year.
Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 instrument valuations are obtained from inputs, other than quoted market prices in active markets, which are directly or indirectly observable in the marketplace and quoted prices in markets with limited volume or infrequent transactions.
Non-recurring Fair Value Measurements
There were no material assets and liabilities measured at fair value on a nonrecurring basis as of March 31, 2019, December 31, 2018 or March 31, 2018.
NOTE 17—RELATED PARTY TRANSACTIONS
As described in Note 4, prior to January 2, 2019, the Company owned a 60% controlling interest in a joint venture formed with Swire, which is a related party. The joint venture arrangement involved Transition Services Agreements ("TSAs") with Swire, under which Swire provided administrative and information technology services to the joint venture. The fees incurred for these services by the joint venture were immaterial during the three months ended March 31, 2018. The Company did not incur service fees for the three months ended March 31, 2019. In addition, the joint venture paid Swire sourcing fees related to the purchase of certain inventory. These sourcing fees were capitalized into Inventories and charged to Cost of sales as the inventories were sold.
Net payables to Swire for services fees, interest expense, and miscellaneous expenses were included in Accounts payable in the Condensed Consolidated Balance Sheets. These net payables were immaterial as of March 31, 2019, December 31, 2018, and March 31, 2018.
In addition to the transactions described above, Swire is also a third-party distributor of the Company's brands in certain regions outside of mainland China and purchases products from the Company under the Company's third-party distributor terms and pricing.
The China joint venture declared a cash dividend of RMB 341.3 million (approximately US$53.3 million) in June 2018 to stockholders of record as of June 14, 2018 and paid the dividend in the third quarter of 2018. The dividend paid to Swire was RMB 136.5 million (approximately US$21.3 million at the date of declaration, which equated to approximately US$20.0 million on the date of payment). The dividend paid to the Company of $32.0 million was eliminated in consolidation. In addition, in September 2018, the Company and Swire entered into an EITA, under which the Company committed to buy out the 40% non-controlling interest in the joint venture. The buyout was subject to various terms and

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COLUMBIA SPORTSWEAR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


conditions. As part of the buyout arrangement, in September 2018 the Company placed $14.0 million in an escrow account as a portion of the funds needed to complete the buyout in early 2019. The escrow amount was shown as Restricted cash on the Condensed Consolidated Balance Sheets at December 31, 2018.
On January 2, 2019, the buyout transaction closed. Pursuant to the terms of the buyout arrangement, the escrow balance of $14.0 million was paid to Swire. As of March 31, 2019, a remaining obligation of $3.9 million, based on the final outcome of certain accounting estimates associated with the China joint venture as of December 31, 2018, was included in Accrued liabilities in the Condensed Consolidated Balance Sheets. As a result of the buyout, the condensed consolidated financial statements of the Company will not separately reflect amounts related to the non-controlling interest. On April 24, 2019, the Company remitted the final payment of $3.9 million to Swire.

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Item 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This quarterly report contains forward-looking statements within the meaning of federal securities laws. Forward-looking statements include any statements related to our expectations regarding future performance or market position, including any statements regarding anticipated sales, gross margins and operating margins across markets or segments, profitability and the effect of specified factors on profitability for 2019, expenses, sourcing costs, effects of unseasonable weather on our results of operations, inventory levels, investments in our business and strategic priorities and the expected timing and effects of such investments, including investments in and implementation of our Information Technology ("IT") systems, intellectual property or other disputes, our direct-to-consumer ("DTC") businesses and other capital expenditures, including planned store additions, access to raw materials and factory capacity, financing, and working capital requirements and resources, ability to meet our liquidity needs, effects of the Tax Cuts and Jobs Act (the "TCJA"), income tax rates and pre-tax income, results of any tax audit, and our exposure to market risk associated with interest rates and foreign currency exchange rates.
These forward-looking statements, and others we make from time to time, are subject to a number of risks and uncertainties. Many factors may cause actual results to differ materially from projected results in forward-looking statements, including the risks described in Part II, Item 1A, Risk Factors in this quarterly report. We do not undertake any duty to update forward-looking statements after the date they are made or to conform them to actual results or to changes in circumstances or expectations.
Our Business
As one of the largest outdoor and active lifestyle apparel and footwear companies in the world, we design, develop, market, and distribute outdoor and active lifestyle apparel, footwear, accessories, and equipment primarily under the Columbia, SOREL, Mountain Hardwear, and prAna brands. Our products are sold through a mix of wholesale distribution channels, our own DTC businesses and independent international distributors. In addition, we license some of our trademarks across a range of apparel, footwear, accessories, equipment, and home products.
The popularity of outdoor activities and active lifestyles, changing design trends, consumer adoption of innovative performance technologies, variations in seasonal weather, and the availability and desirability of competitor alternatives affect consumer desire for our products. Therefore, we seek to drive, anticipate and respond to trends and shifts in consumer preferences by developing new products with innovative performance features and designs, creating persuasive and memorable marketing communications to generate consumer awareness, demand and retention, and adjusting the mix, price points and selling channels of available product offerings. Failure to anticipate or respond to consumer needs and preferences in a timely and adequate manner could have a material adverse effect on our sales and profitability.
Seasonality and Variability of Business
Our business is affected by the general seasonal trends common to the industry, including seasonal weather and discretionary consumer shopping and spending patterns. Our products are marketed on a seasonal basis and our sales are weighted substantially toward the third and fourth quarters, while our operating costs are more equally distributed throughout the year. In 2018, approximately 60% of our net sales and approximately 80% of our operating income were realized in the second half of the year, illustrating our dependence upon sales results in the second half of the year, as well as the less seasonal nature of our operating costs. The expansion of our DTC businesses has increased the proportion of sales, profits and cash flows that we generate in the second half of the year.
We generally solicit orders from wholesale customers and independent international distributors for the fall and spring seasons based on seasonal ordering deadlines that we establish to aid our efforts to plan manufacturing volumes to meet demand. We typically ship the majority of our advance spring season orders to customers beginning in January and continuing through June. Similarly, we typically ship the majority of our advance fall season orders to customers beginning in July and continuing through December. Generally, orders are subject to cancellation prior to the date of shipment.
Results of operations in any period should not be considered indicative of the results to be expected for any future period, particularly in light of persistent volatility in global economic and geopolitical conditions and volatility of foreign currency exchange rates which, when combined with seasonal weather patterns and inflationary or volatile sourcing costs, reduce the predictability of our business.
Business Outlook
The global business climate presents us with a great deal of uncertainty, making it difficult to predict future results. Consistent with the historical seasonality of the business, we anticipate 2019 profitability to be heavily concentrated in the second half of the year. Factors that could significantly affect our full year 2019 financial results include:
•
Continued growth, performance and profitability of our global DTC operations;
•
Unseasonable weather conditions or other unforeseen factors affecting consumer demand and the resulting effect on cancellations of advance wholesale and distributor orders, sales returns, customer accommodations, replenishment orders and reorders, DTC sales, changes in mix and volume of full price sales in relation to promotional and closeout product sales, and suppressed customer and end-consumer demand in subsequent seasons;
•
An increase in current and future inventory levels, as well as our ability to effectively liquidate excess inventory timely and profitably through wholesale closeouts and DTC outlet stores;

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•
Difficult economic, geopolitical and competitive environments in certain key markets globally, coupled with increasing global economic uncertainty;
•
Impacts of recent changes and further changes to tariffs or international trade policy;
•
The implementation of our global DTC and e-commerce platforms and continued optimization of our enterprise resource planning ("ERP") platform;
•
Execution of our strategic initiatives and related business process and system changes across our business, including our supply chain, as well as other capability development across the business;
•
The financial value capture associated with and resulting from Project CONNECT;
•
Economic and industry trends affecting consumer traffic and spending in brick and mortar retail channels, which have created uncertainty regarding the long-term financial health of certain of our wholesale customers;
•
The effects of changes in foreign currency exchange rates on net sales, gross margin, operating income, and net income;
•
Net sales growth and profitability contributed by our LAAP businesses, in particular, China;
•
Performance of our Mountain Hardwear brand as we work to re-invigorate that brand in the marketplace;
•
Impacts resulting from additional guidance about and implementation of the TCJA enacted in 2017; and
•
Accelerated investment in and execution of demand creation, DTC infrastructure and other strategic priorities and initiatives.
These factors and others may have a material effect on our financial condition, results of operations or cash flows, particularly with respect to quarterly comparisons.
Strategic Priorities
As part of our commitment to driving sustainable and profitable growth and relentless improvement, we remain focused on investment in our strategic priorities, including:
•
Driving brand awareness and sales growth through increased, focused demand creation investments;
•
Enhancing consumer experience and digital capabilities in all of our channels and geographies;
•
Expanding and improving global DTC operations with supporting processes and systems; and
•
Investing in our people and optimizing our organization across our portfolio of brands.
Ultimately, we expect our investments to enable market share capture across our brand portfolio, expand gross margin, improve selling, general and administrative ("SG&A") expense efficiency, and drive improved operating margin.
Consumer-First Platform ("C1")
During 2017, we commenced investment in our C1 initiative, which encompasses the global retail platform and IT systems to support the growth and continued development of our omnichannel capabilities. The objective of this initiative is consistent with our strategic priorities to deliver an enhanced consumer experience and to modernize and standardize our processes and systems to enable us to better anticipate and deliver against the needs of our consumers. We are working toward North America implementation of C1 in the second half of 2019 but may choose to move implementation steps into future periods.
Experience First ("X1")
During 2018, we commenced investment in our X1 initiative, which is designed to enhance our e-commerce systems to take advantage of the changes in consumer browsing and purchasing behavior towards mobile devices. It encompasses reimplementation of our e-commerce platforms to offer improved search, browsing, checkout, loyalty, and customer care experiences for mobile shoppers. Once complete, the project will be integrated with our C1 initiative and will be implemented across all of our brands.
We are now working toward a phased implementation of X1 beginning with Europe-direct in 2019, followed by the launch of North America in 2020. We continue to evaluate the timeline to ensure appropriate alignment of the work required to be completed with our retail calendar, including the integration with our C1 platform. We may choose to move implementation steps into future periods.
Project CONNECT
During 2017, we initiated Project CONNECT, aimed at aligning our resources to accelerate execution on our strategic priorities, including initiatives to drive net sales, capture cost of sales efficiencies, generate SG&A expense savings, and improve our marketing effectiveness. Efficiencies within cost of sales are creating a meaningful benefit to product margin within our first quarter 2019 results, primarily driven by assortment optimization, design-to-value initiatives and DTC pricing and markdown optimization. As these improvements are realized, we intend to reallocate resources to our strategic priorities, including incremental demand creation spending and other investments to drive growth across our brands and distribution channels.

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Results of Operations
The following discussion of our results of operations and liquidity and capital resources should be read in conjunction with the condensed consolidated financial statements and accompanying Notes that appear in Part I, Item 1, Financial Statements in this quarterly report. All references to quarters relate to the quarter ended March 31 of the particular year.
To supplement financial information reported in accordance with accounting principles generally accepted in the United States ("GAAP"), we disclose constant-currency net sales information, which is a non-GAAP financial measure, to provide a framework to assess how the business performed excluding the effects of changes in the exchange rates used to translate net sales generated in foreign currencies into U.S. dollars. Management believes that this non-GAAP financial measure reflects an additional and useful way of viewing an aspect of our operations that, when viewed in conjunction with our GAAP results, provides a more comprehensive understanding of our business and operations. In particular, investors may find the non-GAAP measures useful by reviewing our net sales results without the volatility in foreign currency exchange rates. This non-GAAP financial measure also facilitates management's internal comparisons to our historical net sales results and comparisons to competitors' net sales results. Constant-currency financial measures should be viewed in addition to, and not in lieu of or superior to, our financial measures calculated in accordance with GAAP. The following discussion includes references to constant-currency net sales, and we provide a reconciliation of this non-GAAP measure to the most directly comparable financial measure calculated in accordance with GAAP below.
Additionally, we reference certain other non-GAAP financial measures in our first quarter of 2019 financial results and updated full year 2019 financial outlook earnings release, located in the investor relations section of our website at http://investor.columbia.com/results.cfm, which information is not part of this Quarterly Report on Form 10-Q. A reconciliation of these non-GAAP financial measures to comparable measures reported under GAAP can be found in the supplemental financial tables that accompany our earnings release, along with an explanation of management’s rationale for referencing these non-GAAP financial measures.
Highlights of the First Quarter of 2019
•
Net sales increased $47.3 million, or 8%, to $654.6 million from $607.3 million in the first quarter of 2018.
•
Income from operations increased $28.6 million, or 48%, to $88.0 million from $59.3 million in the first quarter of 2018.
•
Net income attributable to Columbia Sportswear Company increased $29.1 million, or 64%, to $74.2 million, or $1.07 per diluted share from $45.1 million, or $0.64 per diluted share, in the first quarter of 2018.

The following table sets forth, for the periods indicated, the percentage relationship to net sales of specified items in our Condensed Consolidated Statements of Operations:
 
Three Months Ended March 31,
 
2019
 
2018
Net sales
100.0
 %
 
100.0
 %
Cost of sales
48.6

 
50.7

Gross profit
51.4

 
49.3

Selling, general and administrative expenses
38.5

 
40.1

Net licensing income
0.5

 
0.6

Income from operations
13.4

 
9.8

Interest income, net
0.5

 
0.3

Other non-operating income (expense), net
0.1

 
—

Income before income tax
14.0

 
10.1

Income tax expense
(2.7
)
 
(2.1
)
Net income
11.3

 
8.0

Net income attributable to non-controlling interest
—

 
0.6

Net income attributable to Columbia Sportswear Company
11.3
 %